BILL ANALYSIS                                                                                                                                                                                                    

                                                                  AB 3 X3
                                                                  Page  1

          (  Without Reference to File  )

          AB 3 X3 (Evans)
          As Amended  February 19, 2009
          2/3 vote.  Urgency 
          |ASSEMBLY:  |     |(January 12,    |SENATE: |     |(February 19,  |
          |           |     |2009)           |        |     |2009)          |
                    (vote not relevant)                (vote not  
           Original Committee Reference:    RLS.  

           SUMMARY  :  Enacts revenue raising provisions necessary to  
          implement the Special Session Budget Agreement.

           The Senate amendments  delete the Assembly version of this bill.   
          Specifically,  the provisions of the Senate amendments are as  
          follows  : 

          1)Increases, temporarily, the rate of the General Fund (GF)  
            portion of the state Sales and Use Tax (SUT) by 1%--from the  
            current rate of 5% to a rate of 6%. The increase would be  
            effective starting April 1, 2009.  The rate increase will  
            sunset on June 30 of either 2011(about 2 years) or 2012 (about  
            3 years), with the longer period contingent on voter approval  
            of the proposed Budget Stabilization constitutional amendment.

          2)Increases, temporarily, the rate of the vehicle license fee  
            (VLF) from the current rate of 0.65% to a rate of 1.15%,  
            except for commercial vehicles with a gross weight of 10,000  
            pounds or more. Revenue from the portion of the increase from  
            0.65% to 1% will be retained by the GF ($121 million in  
            2008-09 and $1.2 billion in 2009-10) and revenue from the  
            additional increase of 0.15% will be transferred to a newly  
            created Local Safety and Protection Account, which is  
            continuously appropriated for specific local public safety  
            programs ($82 million in 2008-09 and $502 million in 2009-10).  
            The VLF rate increase will become effective for registrations  
            beginning May 19, 2009 (corresponding to the timing of a  
            weekly VLF billing cycle) and expire June 30, 2013 if the  
            voters approve the proposed Budget Stabilization  


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            constitutional amendment. If the voters reject the amendment,  
            both components of the rate increase will expire two years  
            sooner-June 30, 2011. Starting in 2010, the Director of  
            Finance must determine by January 10 and upon enactment of the  
            annual budget, whether any of the money derived from the 0.15%  
            rate component have been allocated by the state for other  
            purposes. In the event of an affirmative determination,  
            collection of the 0.15% rate component would be suspended  
            until the director determines that purpose of the allocations  
            has been restored.

          3)Rolls back the dependent credit amount under the Personal  
            Income Tax (PIT). Currently, taxpayers are allowed a  
            non-refundable personal credit of $99 (which applies to the  
            taxpayer and their spouse or domestic partner if filing a  
            joint return) and a dependent credit of $309 (for children and  
            other dependents) on their tax returns for 2008. These credits  
            are phased out for high income taxpayers, and are indexed to  
            inflation each year. This measure temporarily reduces the  
            dependent credit to the size of the personal credit for tax  
            years 2009 through 2012.  However, the higher tax rate would  
            end two years earlier (after tax year 2010) if the voters  
            reject the Budget Stabilization constitutional amendment.   
            Subsequent to 2012 (or 2010), the dependent credit will revert  
            to the size it would have been had current law not been  
            changed (the current $309 as adjusted for inflation). For a  
            taxpayer with two dependents, the smaller exemption credit  
            will raise tax liabilities by $420.

          4)Adds an additional rate component to each personal income tax  
            rate. The add-on rates will be in effect for tax years 2009  
            through 2012. However, the higher rates would end two years  
            earlier (after tax year 2010) if the voters reject the Budget  
            Stabilization constitutional amendment. This rate increase  
            will equal either:
             a)   An increase of 0.25 percentage point to each marginal  
               tax rate if the Director of Finance determines that funds  
               from the federal stimulus package which can be used to  
               offset GF expenditures are less than $10 billion; or, 

             b)   An increase of 0.125 percentage point to each marginal  
               tax rate if the Director of Finance determines that funds  
               from the federal stimulus package which can be used to  
               offset GF expenditures are at least equal to $10 billion.


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            This bill also makes an equivalent temporary change to the PIT  
            Alternative Minimum Tax (AMT) rate-adding either 0.125% or  
            0.25% to the current rate of 7.0%.  The AMT is figured on  
            income after adding back in certain types of deductions and  
            preference items.  Taxpayers pay either their regular tax or  
            the AMT, whichever is higher.

          5)Includes an urgency clause.

           FISCAL EFFECT  : The overall fiscal effect of this measure through  
          2009-10 is to increase revenues by a cumulative total of between  
          $11.1 billion (if sufficient savings from federal funds occur)  
          and $13.0 billion (if federal funds savings fail to meet the $10  
          billion threshold).  Over the total five-year period shown,  
          estimated cumulative total revenues vary from $32.3 billion to  
          $37.2 billion, depending on the federal funds savings (assuming  
          voters approve the Budget Stabilization constitutional  
          amendment).  The specific fiscal effects of the provisions are  
          shown in the table below.


          General Fund Revenue Impact of SB 3 X3
          (Millions of dollars)
          |Tax Provision  |Effective  |2008-0|2009-1|2010-1|2011-1|2012-|
          |               |Date a     |9     |0     |1     |2     |13   |


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          |               |           |      |      |      |      |     |
          |Sales          |April 2009 |$1,203|$4,553|$4,792|$5,195|-$164|
          |tax:1-cent     |through    |      |      |      |      |     |
          |increase       |June 2012  |      |      |      |      |     |
          |VLF rate       |May 2009   |   264| 1,213| 1,238| 1,263|1,187|
          |increase to 1% |through    |      |      |      |      |     |
          |               |June 2013  |      |      |      |      |     |
          |VLF: 0.15%     |May 2009   |   111|   509|   518|   529|  496|
          |rate increase  |through    |      |      |      |      |     |
          |for local law  |June 2013  |      |      |      |      |     |
          |enforcement    |           |      |      |      |      |     |
          |PIT .25% rate  |Tax years  |      | 3,658| 2,454| 2,526|1,147|
          |surcharge      |2009       |      |      |      |      |     |
          |(federal funds |through    |      |      |      |      |     |
          |threshold not  |2012       |      |      |      |      |     |
          |met            |           |      |      |      |      |     |
          | PIT .125%     |Tax years  |      | 1,829| 1,227| 1,263|  574|
          |rate surcharge |2009       |      |      |      |      |     |
          |(federal funds |through    |      |      |      |      |     |
          |threshold met) |2012       |      |      |      |      |     |
          |PIT dependent  |Tax years  |      | 1,440| 1,227| 1,181|  670|
          |credit         |2009       |      |      |      |      |     |
          |reduction      |through    |      |      |      |      |     |
          |               |2012       |      |      |      |      |     |
          |               |           |      |      |      |      |     |
          |Totals:       |              |              |              |              |              |              |
          |  Assuming    |              |         $1578|       $11,373|       $10,229|       $10,694|        $3,336|
          |0.25% rate    |              |              |              |              |              |              |
          |surcharge     |              |              |              |              |              |              |
          | Assuming     |              |        $1,578|        $9,544|        $9,002|        $9,431|$2,763        |
          |0.125% rate   |              |              |              |              |              |              |
          |surcharge     |              |              |              |              |              |              |


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          a All dates are contingent on voter approval in 2009 of a  
          Constitutional Amendment relating to budget stabilization and  
          reform. Absent such approval, the provisions sunset 2 years  
          earlier than shown, as noted in the descriptions of the  
          individual provisions above.

           COMMENTS  :

          1)Existing law imposes a sales or use tax on the sale or use in  
            this state of tangible personal property, absent a specific  
            exemption.  The combined sales tax rate in California  
            currently ranges from 7.25% (for counties with no optional  
            transactions and use taxes) up to 9.25% (for the City of South  
            Gate in Los Angeles County). The combined rate consists of a  
            state GF rate of 5%, statewide special fund rates totaling  
            1.25%, a local tax rate of 1%, and local optional rates. Sales  
            and use taxes, as general taxes on consumption, are generally  
            considered to be more regressive than some other taxes, such  
            as California's personal income tax, since purchases of  
            taxable goods absorb a larger portion of the income of  
            lower-income taxpayers than of higher-income taxpayers.  Also,  
            some researchers have asserted that significant increases in  
            sales taxes can have negative impacts on spending and the  
            economy. However, given the imperative of a balanced budget  
            and the magnitude of the current budget shortfall, the  
            economic effects of a sales tax rate increase cannot be  
            considered in a vacuum, but must be weighed against the  
            effects of other additional spending reductions or tax  

          2)The VLF is a state tax levied on the purchase price of a  
            vehicle, and subsequently annually assessed against the  
            vehicle's value adjusted by a statutory depreciation schedule.  
            Proposition 1A, approved by the voters in November 2004,  
            requires that VLF revenue from the existing 0.65% rate be  
            allocated to support local health, mental health, and social  
            services costs under Realignment or otherwise allocated to  
            local government. However, the Legislature may increase the  
            VLF rate, and there is no restriction on the use of the  
            additional revenue.

          3)Dependent exemption credits are usually justified on the  
            grounds that taxpayers who raise children or care for others  
            incur extra expenses and therefore have less disposable income  


                                                                  AB 3 X3
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            from which to pay taxes. The amount of the credit, however,  
            has varied considerably over the past 30 years, and according  
            to the Legislative Analyst's Office, there is no consensus on  
            how large the credit should be.  Prior to 1987, the dependent  
            credit was roughly one third the size of the personal credit,  
            and from 1987 through 1997, the dependent and personal credits  
            were the same. The larger dependent credit currently in effect  
            is the result of legislation passed in 1997, which tripled the  
            dependent credit amount starting in 1998. This bill  
            temporarily restores the equivalence of the personal and  
            dependent credit that was in effect prior to 1998.

          4)Existing law imposes a state personal income tax (PIT) and  
            provides for six graduated PIT tax rates of 1%, 2%, 4%, 6%,  
            8%, and 9.3%, with an additional 1% Mental Health Tax on  
            taxable income over $1 million (Proposition 63, 2004). This  
            measure adds an additional rate component to  each  PIT rate,  
            equal to either 0.125 percentage point or 0.25 percentage  
            point depending on the status of federal funds. Assuming the  
            0.25 percentage point increase is in effect, the temporary  
            rates would range from 1.25% to 9.55%. This will increase tax  
            liabilities by either 0.25% or 0.125% of taxable income-in  
            effect slightly flattening the current progressive tax rate  
            structure, but also making PIT revenues slightly less  
            volatile. As an illustration of the impact on taxpayers, the  
            0.25% surcharge would result in additional state taxes of  
            about $125 for taxpayers filing jointly with $50,000 in  
            taxable income, $250 for taxpayers filing with $100,000 in  
            taxable income, and $1,250 for taxpayers filing jointly with  
            $500,000 in taxable income. In addition, the rate increase at  
            the lowest brackets will result in tax liabilities for some  
            persons who currently have none.  This is because some  
            taxpayers whose tax liability currently is fully offset by the  
            personal and dependent credits will now have tax liabilities  
            that somewhat exceed the credits (and because this measure  
            also reduces the amount of the dependent credit). Since state  
            personal income taxes can be taken as itemized deductions on  
            federal returns, the net impact of the surcharge may be  
            reduced by as much as one third for some taxpayers.

           AS PASSED BY THE ASSEMBLY  , this bill expressed the intent of the  
          Legislature to make statutory changes related to the Budget of  


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           Analysis Prepared by  :   Daniel Rabovsky/ BUDGET/ (916) 319-2099

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